Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

The 3 Best Real Estate Stocks to Buy in 2017

Real estate, dividends, and growth can make for a powerful combination.

Want to invest in real estate but hate the hassle of being a landlord? You've come to the right place. I love the idea of investing in real estate as an asset class, but I'd much rather give my money to someone who knows what they are doing.

Fortunately, there are plenty of real estate stocks out there, so you can have someone else do the heavy lifting with your money. The key, then, is to figure out how to buy the right real estate stocks. I think that for most investors, real estate investment trusts (REITs) are just the ticket.

How to find the best real estate stocks

People usually buy REITs because they're looking for income in the form of dividends -- so to make the top list, a real estate stock must have a well-covered dividend with opportunities to grow. That has the added bonus of signaling that management is conservative and thoughtful in its capital allocation and not just ratcheting up the dividend to unsustainable levels to juice the short-term stock price.

Image Source: Getty Images.

With interest rates climbing and likely to continue doing so, the best real estate stocks have to be set up to weather that storm -- either with a cost-of-capital advantage over the competition, a conservative balance sheet leaving them lots of extra wriggle room, almost no floating-rate debt, or preferably all three.

Finally, the best real estate stocks play on demographic or spending trends that are here to stay. A REIT that invests in buildings primarily for movie rental stores isn't a good buy, even if it meets the first two criteria I laid out. I want REITs that can grow -- stocks that can boost their cash flow over time to increase their dividends and build ever-stronger (and more diverse!) businesses so I can profit over the long term.

Here are my three picks.

Betting on shopping

Realty Income Group (NYSE:O) bills itself as "the monthly dividend company," and with good reason. It has paid over 560 consecutive monthly dividends, all while boosting its payout by an average of 4.7% annually. It invests primarily in freestanding retail buildings. More recently, it has started diversifying into non-retail spaces -- but these represent less than 20% of its portfolio.

Realty Income has $5.5 billion in debt, over 90% of which is fixed-rate -- meaning that its APR won't shift when interest rates increase. Its size and scale as the largest REIT in the freestanding retail space and its high credit rating (Fitch gave it a BBB+, Moody's rates Realty Income at Baa1) give it a cost-of-capital advantage over its competitors, as it can take out debt at a lower APR.

This REIT offers some other important protection, too. First off, it has great cash flow diversity, with no tenant representing more than 7% of revenue. Plus, its top-20 tenant list reads like a Who's Who of well-known, stable companies. It includes Walgreens, Sam's Club, 7-Eleven, LA Fitness, and FedEx. Many of its tenants represent industries with significant demographic tailwinds, with 11.1% of its portfolio leased by drug stores, 7.5% by gyms and other health and fitness concepts, and 8% by dollar stores.

Tack on a monthly dividend yielding 4.7% that annually costs 87% of funds from operations (FFO), and it's no wonder Realty Income makes the list.

Investing in healthcare

I'm double-dipping on healthcare, since Realty Income also sort of plays on that trend, but Welltower (NYSE:HCN) was just too good to pass up.

Welltower primarily invests in properties providing senior care, with 70% of its in-place net operating income stemming from senior housing, 13% to long-term care and post-care, and 17% from outpatient medical. With 10,000 baby boomers per day turning 65 over the next decade or so, there's a clear demographic tailwind that should benefit Welltower for a long time hence.

Medicare and Medicaid reimbursement rates are perennial concerns for most senior-care operators, as the government payers can change their prices and wipe out profit margin with little warning. Fortunately, Welltower's portfolio is 93% private pay, meaning it has minimal exposure to changes in government reimbursement.

Lest you worry about competition, Welltower's portfolio is concentrated in urban centers -- meaning lots of burdensome zoning, regulation, and construction costs if competitors seek to build new senior housing. And Welltower has furthered its diversification by snapping up portfolios in both the U.K. and Canada, giving it an international opportunity that could further growth over the long haul.

Over 90% of Welltower's debt is fixed-rate, and it's sitting on $400 million in cash, which gives it room to pay down debt where it makes sense. While Welltower has a fairly high debt load -- about $11 billion, compared with a market cap of about $27 billion -- the majority of that debt doesn't come due until after 2021, giving management plenty of room to pay.

With a 4.8% dividend costing 84% of FFO, Welltower looks like a great, safe play on a big long-term trend.

Investing in storage

Extra Space Storage (NYSE:EXR) operates over 1,400 self-storage properties across 38 states in the United States. Self-storage is a growth industry that's always surprised me, but the fact is that people have too much stuff and need a place to house it. As a result, the number of self-storage units in the U.S. doubled from 1998 to 2012, according to Bloomberg. Yet even with that explosive growth, operators with premium self-storage facilities (think air-conditioned) have solid pricing power. Extra Space Storage successfully grew its same-store revenue by 5.8% year over year last quarter -- and same-store net operating income grew by a whopping 9.2%, too.

Extra Space is rapidly adding new stores to the mix as it aims to grow by acquisition. For example, it acquired 165 stores in a single megatransaction in 2015. Yet even at its current size, there's plenty of room left to grow. Management estimates that Extra Space has roughly 5% of the U.S. self-storage market's square footage, with its largest competitor, Public Storage, controlling only 7.1%. Roughly 45% of the market's square footage is "institutional quality" and not currently controlled by a REIT. Lots of opportunity there.

Now, all that acquisition comes at a cost: Extra Space is sitting on around $4 billion in debt, according to S&P Market Intelligence -- and with a market cap of only around $10 billion, that's a fairly highly leveraged balance sheet. There are a few ameliorating factors, however. First, 69% of that debt is fixed-rate -- so Extra Space Storage should be able to handle the uncertainty tied into Federal Reserve interest-rate increases. Second, Extra Space has an interest coverage ratio of roughly five, meaning it's making enough money in earnings before interest and taxes to pay its interest expense 5 times over. At some point, Extra Space will probably need to slow down its acquisition spree -- but for now its balance sheet remains in good shape.

Its 4% dividend requires only 80% of FFO, which leaves plenty of room to grow as the business scales.

Investing in real estate

Big, diversified REITs like these are great ways to get exposure both to real estate and to big demographic tailwinds that should help income investors earn plenty of dividends over the long term. What's more, investors can get this "double whammy" benefit without having to actually own real estate, with all the headaches that entails -- think property taxes, bad tenants, and the like. In my opinion, that's what makes these stocks so attractive -- and the best real estate stocks for 2017.